Microfinance Is Mostly a Scam (2015)

Micro finance is definitely not “mostly a scam.” My dad is in the international development field, and was an early fan of Mohammed Yunus, the Bangladeshi economist who pioneered micro finance.<p>The article doesn’t do a good job proving its case. Looking at interest rates in isolation is meaningless. Is there any evidence these micro finance banks are achieving above-normal ROIs by exploiting people who need loans? Grameen Bank, one of the original micro finance institutions in Bangladesh, has a return on invested capital of around 6.5%. That’s not very high at all, especially considering the risky nature of their portfolio.<p>Well-meaning people worries about the notion of profiting from poor people are actually holding them back. Capital is what turns poor people into middle class people. Capital is what turned Korea from a poor country into a rich country. Foreign assistance, addressing healthcare, family planning, and education, helps catalyze the process. But all of that is pointless without capital. Foreign direct investment is one piece of that puzzle, and micro finance can be another piece of that puzzle.

10 years ago out of college I helped set up some microfinance banks in Coffee producing communities in Honduras. At first your taken aback that people are paying 40%+ annual interest rates on small loans for these banks. But when your in the communities talking to people you realize their opportunity costs are like 400%+. Example is in most coffee producing communities in Central America farmers have to sell their products before they even grow them for 4-10x bellow the market rates if they just waited and banded together as co-op. Their issue is no access to financial products and they are substance farmers with no option but sell to coyotes to get money for food. In this world micro finance is a game changer in their quality of lives for it creates options

I personally think that this article is really just skimming the surface in the area some people broadly refer to as development work. Helping people toward sustainable, more independent situations is really difficult work, and there are a multitude of examples where even people with the best intentions did more harm than good, particularly when they blindly follow their own designs without paying specific attention to the people they&#x27;re helping and the complex web of circumstances and history they live within. As the article detailed in the area of microfinance, there are unfortunately many people who shamefully further their own interests (money, reputation, etc.) in the guise of charity.<p>I really do think that applied correctly, microfinance is one tool of many that can be effectively applied for real good if it is not abused. The reason I think that is that in contrast to just giving someone something, microfinance can be more empowering in certain circumstances. In some development work, empowerment is a key ingredient to moving toward lasting change. I absolutely agree that there is potential for and are many examples of microfinance being used in harmful ways, but I think the same is true for just about every tool of development work. Even simply giving a person cash can be bad in some circumstances. This comes from my personal struggles in working a bit in the area of development as part of an organization that attempts to help people in lasting ways by leveraging a very limited pool of resources.<p>All that to say that I agree that microfinance is used to abuse people, but I don&#x27;t think its use as such disqualifies it as a potential development tool.

I long ago developed the opinion that most &quot;innovations&quot; in money and finance are scams whether intentional or not.<p>Money and finance are like power and water. They belong to a class of things that should be unbelievably boring, things you forget exist when they are working properly.<p>A related idea I developed from watching the cryptocurrency world is that it is really hard to have a financial system that is anything but gambling, Ponzis, and fraud. These are the paths of least resistance in finance, the things money seems to &quot;want&quot; to do. The vast maze of regulations in conventional finance are the outcome of a multi hundred year evolutionary battle to maintain at least some level of actual productive activity in the financial world.<p>The reason money &quot;wants&quot; to gamble and play Ponzi games is likely related to how human dopamine reward loops work. We get dopamine hits from gambling and are very prone to it, while productive investment is often too slow to deliver regularly spaced Skinner box rewards.

The problem with micro finance is that it’s not scalable.<p>It takes effort and energy to setup in a certain location, and then will take the same effort and energy to setup in another location (minus some minuscule efficiencies), because what’s key in micro finance is understanding the needs of each individual community and catering to that.<p>If micro finance was scaleable, that would imply the same strategies would be broadly profitable across a range of communities. But at that point there is no need for micro finance. Regular banking entities could, and would, have stepped in and made money.

Good micro lending options do exist, Kiva has a great track record[1].<p>My perspective, the exploitive micro lending options exist due to lack of financial education in our K-12 primary schools globally.<p>Teaching the average student the fundamentals of accounting and finance would be much more practical than trigonometry or pre-calculus. For base IRR, NPV, DPP, etc. algebra 1 is plenty of a mathematics foundation to complete.<p>[1] <a href="https:&#x2F;&#x2F;www.kiva.org&#x2F;about&#x2F;impact" rel="nofollow">https:&#x2F;&#x2F;www.kiva.org&#x2F;about&#x2F;impact</a>

&gt; It’s a nice story, but of course it means, even in this best case, that the people around her who had previously done what she now does have been pushed out of business. They need to find a new job.<p>This is the lump of labour fallacy[0]. There’s a whole body of economic theory but generally arguments against the fallacy are that lowering prices is likely to increase demand (so competitors could make the same investment and compete for the increased demand and be better off as a whole; productivity increases may lead to new ancillary or similar products that were previously not cost effective to produce, again increasing the pie; those increasing their income have to invest or spend it, so those put out of business could start a new business taking investment or spending from their previous competitor. Reality is obviously much more complex and definitely in the short term it can lead to real misery for those losing the competition and not having the time or savings to wait for a new job or for an investment to start paying off. But that doesn’t mean that we should just stop innovation and stop trying to become more productive.<p>The rest of the arguments in the article against micro finance seem to be issues with underperforming legal and governmental institutions that fail to prevent and remedy fraud and abuse of people in precarious situations. In these systems&#x2F;countries, there will always be fraud and abuse no matter how you try to help people (including charity, starting real companies and trying to give people real jobs with reasonable pay).<p>That doesn’t mean you should stop these initiatives. Hopefully, improving conditions for individual people will help improve systemic conditions and vice versa.<p>[0] <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Lump_of_labour_fallacy" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Lump_of_labour_fallacy</a>

I think &quot;Microfinance is a scam&quot; oversells the claim.<p>The truth is much closer to &quot;Microfinance is payday loans&quot;. To the extent that you believe payday loans can help the poor in the developed world, microfinance can also help the poor in the developing world.

I think one of the questions is whether microfinance works as a bank, to make a profit, or works in lieu of donations, where loans are subsidized and act as a force multiplier on donor money.<p>If I had my druthers, I&#x27;d set up a VC firm in the developing world, which funded businesses on reasonable terms, <i>knowing</i> I&#x27;d lose money, but:<p>1) Generating a stream of occasional successful enterprises.<p>2) Even for failures, giving people an opportunity to go through the learning experience of launching a startup.

Having volunteered for a few years overseas educating in this industry this is somewhat a true title but not a great write up.<p>Microfinance does includes banking, remittance and insurance and other things microfinance. But most people think it&#x27;s loans. So ok.<p>The scam is it&#x27;s fully self sufficient now anyway and kinda always has been. Doesn&#x27;t need charity. Some Government oversight however helped I think. You can study the numbers on a few experiments governments preformed.<p>I take issue with this bit &quot;that the people around her who had previously done what she now does have been pushed out of business&quot;<p>This is exactly what you want. Innovation.<p>What I saw however was people just exactly copying local business. Another market stall which just reduced everyone&#x27;s wages.<p>The author also doesn&#x27;t seem to get TVs make a big difference to the poor both in happyness and reducing poverty. But perhaps microfinance doesn&#x27;t help getting TVs.<p>Lot more that could be said.

Many microfinance organizations [1] provide much more than loans. They provide business training. They set up peer groups to provide mentoring and accountability. They are essentially providing local versions of the US SBA [2] and Y-Combinator, critical infrastructure for society. These organizations have huge positive impact.<p>[1] <a href="https:&#x2F;&#x2F;opportunity.org" rel="nofollow">https:&#x2F;&#x2F;opportunity.org</a><p>[2] <a href="https:&#x2F;&#x2F;www.sba.gov" rel="nofollow">https:&#x2F;&#x2F;www.sba.gov</a>

I remember back when microfinance was winning Nobel prices and I had just started studying economics I considered investing in it.<p>This was the true promise of capitalism - investing money will make everyone better off.<p>However, the only microfinance organizations available would only take donations not investments.<p>So I would have had to donate money to someone in order for them to lend it to a poor farmer for outlandish 30% and above interest rates!<p>I’d rather donate it to an actual charity in that case.

&gt; It’s a nice story, but of course it means, even in this best case, that the people around her who had previously done what she now does have been pushed out of business. They need to find a new job.<p>So, let&#x27;s undo the industrial revolution and get back to weaving cotton by hand.<p>Seriously?

The intentions are there, but if you only look for the good in people you will be taken advantage of and swallowed by grifters. Some who are driven by selfishness, some who are driven by lust for disruption and&#x2F;or destruction.<p>The general trend in the west right now seems to be an overestimation of the good in all of us, and society is increasingly paying for it. I know that many are downtrodden for reasons outside of their control but that doesn&#x27;t excuse the fact that a lot of poor people are poor because they are shitty, antisocial people, and no amount of mentoring or social programs will fix them.<p>That&#x27;s where redlining comes from. That&#x27;s why poor people pay higher interest for loans, if they can even get them. It&#x27;s not just blind classism or &quot;systematic racism&quot; without a cause. Social groups are an emergent phenomenon, not a deliberate invention.

I genuinely want to believe in it, but as others have already mentioned, charities seem to have a better track record in what they are trying to accomplish ( my favorite example being a goat gift ).

Mods: (2015)<p>Not sure much has changed, but the article is nearly 5 years old.

Um, this is just a random subset of the truism:<p>&quot;Capitalism is mostly a scam&quot;<p>(which is mathematically true but nonetheless it&#x27;s the best system we got)<p>P.s. I&#x27;ve lent to dozens of people on kiva and tracked their stories - really uplifting and highly recommended... but you have to be choosey...

Those interest rates are extortionate. I don&#x27;t care what nuance or anecdotal hypothetical feel-good story you tell yourself. This stuff is exploitative and, even worse, exploitative in the name of &quot;doing good&quot;.

I agree with the author that under-regulated microfinance is prone to failure.<p>But the conclusion that I draw from that is not &quot;microfinance is prone to failure&quot; but that <i>all under-regulated finance is prone to failure</i>.

Any financing scheme that charges interest is a scam. We&#x27;ve known this for thousands of years, but people don&#x27;t learn.

No comments about the head proccessor who has a head grinder? WTF